I have a rental property that had fire damage in July 2021. I filed insurance claim and hired a contractor to restore the damage to the kitchen and the rest of the house. I did not claim casualty loss for 2021, so I need to amend my 2021 return. Insurance paid for lost rent, which I included part in my 2021 return and the rest will be included in rent income in my 2022 return.
Events timeline:
2021:
- Kitchen fire in July
- Insurance claim filed and contractor hired to clean and demo the damaged area of the house
- Insurance paid for boarding, cleaning and demo (completed in 2021), lost rent, and their estimate of the restoration cost (about 30K), which was half of what contractor had estimated (about 75K). I paid half of the contractor’s restoration cost estimate (about 35K)
2002:
- Insurance paid another 32K for restoration in July
- Contractor completed restoration in July; I made the final payment (40K) to contractor
- My out-of-pocket cost of restoration was 10k plus 1k deductible
Except for cleaning the fire damage and gutting the damaged area, restoration did not start until 2022 and the work was not completed until July 2022. Insurance payout for restoration was not a single lump sum. They paid about half in 2021 and the rest about a year later in 2022. I paid about half of the restoration cost to contractor in 2021 and the rest in 2022 after completion of the work.
My questions: how should I handle insurance payout that was done partly in 2021 and partly in 2022. If I include insurance payments as income but depreciate restoration, wouldn’t that cause large tax liability for me? And how to account for payments I made to contractor in 2021 and the remaining payment made in 2022 (that is, where these payments go in TT)? How to depreciate property after restoration. Restoration included new appliances, new floor, new windows, etc. Do I need to depreciate individual items or the restoration as a whole? Thank you in advance for all your help.
